BRANDON UNIVERSITY RETIREMENT PLAN. Annual Report for the year ended December 31, Members of the Board of Trustees (as of December 31, 2010):

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3 Annual Report for the year ended December 31, 2010 Members of the Board of Trustees (as of December 31, 2010): Todd Fugleberg Bryan Hill Cecilia Jackson Eric Raine Warren Wotton George Manby Barbara Smith Scott Lamont Austin Gulliver Peter Letkeman BUFA BUFA MGEU MGEU IUOE "A" IUOE "D" Exempt Staff Board of Governors Board of Governors Pensioners Consultant/Actuary Investment Manager Investment Sector Managers Custodian Plan Administrator Eckler Ltd. Connor, Clark & Lunn Investment Management Ltd. CC&L Canadian Q 120/20 Fund (Canadian Equities) SRA Canadian Equity Fund PCJ Canadian Equity Fund New Star EAFE Fund CC&L USA Equities Fund CC&L Bond Fund CIBC Mellon Global Securities Services Company Board of Trustees of the Brandon University Retirement Plan 2

4 General Information a) The Brandon University Retirement Plan is a final average, defined benefit plan, which provides a benefit to all eligible employees of Brandon University upon retirement, termination or death. The Plan is administered by the Board of Trustees of the Brandon University Retirement Plan. A full description of the Plan is contained in the official Plan document and is available on the Brandon University website or from the Human Resources Office. b) The Plan is fully funded by contributions from Plan members and the University, as well as the income from investments. Net assets in the plan, at market value, at December 31 were: 2010 $108.8 million 2009 $98.7 million million million million c) Similar to many other maturing pension plans in Canada, the number of pensioners is increasing relative to the number of active contributing members of the Plan. Over the past ten years, the number of pensioners has increased from 41% of the active members to 48% in Brandon University Retirement Plan membership at December 31: Active members Pensioners Deferred, inactive and Pending Election 3

5 Pensioners as a Percentage of Active Members % % 46.0% % % Pensioners Active Members Percentage % 38.0% % % An impact of increasing numbers of pensioners relative to active contributing members is the decreasing ability of the annual contributions from Plan members and the University to cover the annual cost of pensions, and the increasing need for investment income of the Plan to fund future requirements. In 2001, the cost of pensions paid out totaled 106% of what was being contributed annually by the Plan Members and the University. Significant increases in contributions by both the Plan members and the University in recent years have reduced the ratio of pensions paid to contributions collected to 92%. In 2010, the investment returns were reasonable and previous highs were achieved again. However, the investment returns anticipated for the period 2007 to 2010 were higher than the investment returns achieved for that period and this has negatively affected the valuation of the Plan. Plan member transactions: Member and University contributions to the Plan $4,864,598 $4,505,018 Transfers from other plans 127, ,747 Pensions paid to retired members 4,494,014 4,428,912 Death benefits and refund settlements due to terminations 885,143 1,178,824 4

6 d) The Brandon University Retirement Plan is subject to a periodic valuation by an independent actuary to determine whether the Plan assets and contribution level are adequate to provide future benefits. The Pension Benefits Act of Manitoba requires that such a study be done at least every three years. The most recent valuation was performed by Eckler Ltd. as at December 31, Using the solvency valuation method, the Plan had a deficiency of assets over actuarial (calculated) liabilities of $14,449,000. Using the going-concern or aggregate method, the Plan had an unfunded liability of $32,565,000. The University is required to make special payments to fund this unfunded liability over a 15 year amortization period. The annual cost of this special payment for 2011 is $3,126,000. Since the solvency ratio of the plan is less than 0.90, the Pension Benefits Act of Manitoba requires that the next valuation be performed no later than December 31, e) If the net investment return on the Fund, as determined by the Actuary using smoothed asset values, exceeds 6.0% per annum, each pensioner who was receiving a pension at the end of that year, is entitled to receive an increase in that pension effective from July 1 in the following calendar year. The details of this entitlement are recorded in article 7.3 of the Brandon University Retirement Plan document. The result of this calculation over the past 10 years is as follows. Brandon University Historical Increases (Article Supplementary Pension) (1) (2) (3) (4) (5) Year Gross Actuarial Return Net Actuarial Return Excess of Net over 6% CPI Actual COLA given Effective Date of COLA Increase % 4.30% Nil 0.70% Nil 1 July % -4.19% Nil 3.90% Nil 1 July % 7.25% 1.25% 2.00% 1.30% 1 July % 1.87% Nil 2.10% Nil 1 July % 6.20% 0.20% 2.20% 0.20% 1 July % 16.30% 10.30% 1.60% 1.60% 1 July % 8.68% 2.68% 2.40% 2.40% 1 July % % Nil 1.20% Nil 1 July % 16.15% 10.15% 1.30% 1.30% 1 July % 3.23% Nil 2.40% Nil 1 July 2011 COLA = lower of columns (3) or (4) 5

7 Investment Management Objectives On December 30, 1994, the current Investment Manager (Connor, Clark & Lunn, Investment Management Ltd.) was appointed. Since that time the plan investment management has been diversified by making use of several investment sector specialists within the family of companies working with CC&L, under the general management of CC&L. The Investment Manager operates with the general objective to maximize long-term total returns while protecting the capital value of the fund. The Manager is to attain an average rate of return of 3% over the CPI increase for the same period. Secondary objectives are to generate returns in excess of the return of the Benchmark Fund over rolling four-year periods and to perform in the top third of investment managers as measured by a nationally recognized service. RBC Dexia Benchmark Investment Analytics (BIA) was used as the measurement service for this report. The Brandon University Retirement Plan investment performance met the objective of CPI plus 3% for 2010 (BU Plan was 11.2% vs. 5.4%). It did not meet the objective for the four year rolling average ending in 2010 (BU Plan was 3.4% vs. 4.8%). The Plan met the rolling four year average benchmark return (BU Plan 3.4% vs. Benchmark 3.4%). Although the top third of managers is not reported by BIA, the BU Plan annual return (11.2%) was higher than the median (9.9%) and lower than the top 25% (11.3%) of balanced fund investment managers in The BU Plan four year rolling average return (3.4%) was higher than the median (2.8%) and equal to the top 25% (3.4%) of balanced fund investment managers. Lastly, with the reasonable returns in 2010, the portfolio, at $108.8 million, is higher than the December 31, 2007 previous high of $103.9 million. Investment Performance Period Annual Ending Total Rate of December 31 Return Increase in CPI % 2.4% % 1.3% % 1.2% % 2.4% % 1.7% Benchmark return for % Four year rolling average ending 2010 Retirement plan performance 3.38% Benchmark performance 3.35% 6

8 BIA Balanced Fund Performance Summary For the Period Ending December 31, 2010 Top quartile (12 months) 11.3% Median (12 months) 9.9% BU Retirement Plan (12 months) 11.2% Top quartile (4 year rolling) 3.4% Median (4 year rolling) 2.8% BU (4 year rolling) 3.4% Annual Investment Performance Percent Plan Return Benchmark return CPI plus 3% Note: The chart reports CPI plus 3.5% until that was changed in 2007 to CPI plus 3% -20 7

9 Rolling Four Year Average Investment Returns Percent 8 6 Plan Return Benchmark return CPI plus 3% 4 2 Note: The chart reports CPI plus 3.5% until that was changed in 2007 to CPI plus 3% The investment mix of the Brandon University Retirement Plan is established by the investment manager based on market expectations within guidelines authorized by the Trustees of the Plan. On December 31, 2010 the asset mix and the annual performance in each sector follows: % of 12 month Benchmark Portfolio return return Canadian Equities 38.6% 18.2% 17.6% Foreign Equities 26.1% 6.8% 9.1% Bonds 34.4% 7.8% 6.7% Cash 0.9% 0.7% 0.5% TOTAL FUND 100.0% 11.2% 10.2% 8

10 Fund Asset Mix - December 31, 2010 Cash 1% Bonds 34% Canadian Equities 39% Foreign Equities 26% Asset Mix Trend Percent of Portfolio Canadian Equities Foreign Equities Bonds Cash 9

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13 Statement of Financial Position as at December 31, ASSETS Accounts receivable $ 4,142 $ 380,505 Investments (note 2 b) Cash and short-term investments 1,029,540 2,169,902 Bonds and debentures 37,489,664 32,386,196 Canadian equities 41,996,723 38,841,476 Foreign equities 28,344,451 25,006, ,860,378 98,404,366 Total Assets 108,864,520 98,784,871 LIABILITIES Accounts payable 64,519 44,749 Prepaid pension contributions 18,460 Total Liabilities 64,519 63,209 Net asssets available for pension benefits 108,800,001 98,721,662 Pension obligations 139,177, ,797,000 Deficit (going concern basis) $ (30,376,999) $ (14,075,338) The accompanying notes are an integral part of the financial statements. 12

14 Statement of Changes in Net Assets Available for Pension Benefits for the year ended December 31, CONTRIBUTIONS Members $ 1,921,060 $ 1,792,267 University 2,943,538 2,712,751 Transfers from other plans 127, ,747 4,991,930 4,725,765 OTHER INCOME Investment income Interest 1,314,806 1,628,331 Dividends 1,410,449 1,569,034 2,725,255 3,197,365 Change in fair value Realized 1,982,272 (6,683,185) Unrealized 6,263,953 17,777,546 8,246,225 11,094,361 Total Increase in Net Assets 15,963,410 19,017,491 PAYMENTS Benefit payments Retirements 4,494,014 4,428,912 Refunds 799,669 1,178,824 Deaths 85,474 5,379,157 5,607,736 Administrative expenses Actuarial and consulting fees 62,537 65,996 Custodian and plan administration fees 106,021 97,011 Legal and audit fees 6,440 5,573 Investment management fees 330, ,168 Trustee expenses , ,627 Total Decrease in Net Assets 5,885,071 6,071,363 Net Increase in Assets Available for Pension Benefits 10,078,339 12,946,128 Net Assets Available For Pension Benefits, beginning of year 98,721,662 85,775,534 Net Assets Available For Pension Benefits, end of year $ 108,800,001 $ 98,721,662 The accompanying notes are an integral part of the financial statements. 13

15 Statement of Changes in Pension Obligations for the year ended December 31, Interest accrued on benefits $ 6,470,000 $ 6,160,000 Benefits accrued 4,825,000 4,604,000 Benefits paid (5,379,000) (5,608,000) Actuarial gain (166,000) Changes in actuarial assumptions 20,630,000 Net Change in Pension Obligations 26,380,000 5,156,000 Pension Obligations, beginning of the year 112,797, ,641,000 Pension Obligations, end of year $ 139,177,000 $ 112,797,000 The accompanying notes are an integral part of the financial statements. 14

16 Notes to the Financial Statements for the year ended December 31, Description of the Plan The following description of the Brandon University Retirement Plan is only a summary. More complete information is contained in the official Plan document. a) General The Brandon University Retirement Plan is a final average contributory defined benefit pension plan established April 1, 1974 for the benefit of the employees of Brandon University. The assets of the Plan are held in trust in the name of ten Trustees - eight elected by and from the Plan membership and two appointed by the Board of Governors. The Trustees oversee the administration of the Plan and set forth the investment guidelines. Their obligations and responsibilities are defined in a trust agreement with Brandon University. An asset manager invests the Plan assets based on the approved investment guidelines and according to the terms of the Managed Account Agreement. The Plan is registered with the Pension Commission of Manitoba and meets the requirements of the Pension Benefits Act of Manitoba and the Income Tax Act (Canada). b) Membership Unless otherwise stated, all Brandon University employees are eligible to become members of the Plan on their date of employment. Full-time and certain part-time employees are required to join the Plan. Membership is optional for other part-time and certain specified employees. c) Funding The Plan receives its funds from: i) the contributions of members ii) the required and special contributions of Brandon University iii) the income from investments An actuarial valuation is performed at least once every three years to determine the adequacy of the funding for pension benefits (see note 2g). d) Plan Benefits The Plan provides for the payment of benefits to a member upon retirement, death, or termination of employment with Brandon University. Retirement benefits are determined by a formula which takes into consideration the member's pensionable earnings, term of employment with Brandon University and a percentage of the Canada Pension Plan earnings. Benefits are payable for the lifetime of the member. Full benefits are payable (a) upon normal retirement; (b) upon early retirement for members who qualify. Reduced benefits are provided to members who retire early and do not qualify for full benefits. Death and termination benefits are based on the value of the member's pension as determined by the Plan Administrator at the time of death or termination of employment. The options available to beneficiaries and terminating members are outlined in the official Plan document. 15

17 Notes to the Financial Statements for the year ended December 31, Significant Accounting Policies a) General The Brandon University Retirement Plan prepares its financial statements in accordance with Canadian accounting standards for pension plans. b) Investments Investments are recorded at market value on a trade date basis. Fair values of investments are determined as follows: Fixed Income Short term investments are recorded at cost which approximates market value. Bonds and debentures are valued at market by an independent securities valuation company. Equity Publicly traded securities are recorded at year end market prices or the average of the latest bid and ask prices quoted by an independent securities valuation company. c) Investment Income Dividend income is recognized on the ex-dividend date and interest income is recognized on the accrual basis as earned. d) Foreign Currency Translation The fair value of investments denominated in foreign currencies is translated into Canadian dollars at the exchange rate in effect at year end and the resulting change is included in the change in fair value of investments. Revenue and expense transactions are translated at the exchange rates prevailing on the dates of the transactions and are included in investment income at the translated amounts. e) Contributions Contributions from the members and the University are recorded on an accrual basis. Cash received from members as transfers from other pension plans is recorded when received. f) Financial Instruments The financial instruments of the Plan consist of cash, accounts receivable, investments and accounts payable. The fair value of these financial instruments approximates their carrying values. 16

18 Notes to the Financial Statements for the year ended December 31, 2010 g) Funding for Pension Benefits An actuarial valuation performed by the Plan's actuary, Eckler Ltd., to determine the Plan's funding status as required by The Pension Benefits Act of Manitoba, was prepared as at December 31, 2010 and will be filed with the Manitoba Pension Commission in The results of that valuation are presented in these financial statements. The valuation is based on actuarial assumptions with regard to demographics, rate of return on investments and salary increases to compare the Plan's actuarial assets with its actuarial liabilities. The next actuarial valuation of the Plan will be effective December 31, 2011 and will be completed in h) Use of Estimates Preparation of the financial statements requires management to make estimates and assumptions that primarily affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of changes in net assets available during the year. Actual results could differ from these estimates. 3. Financial Risk Management Management of investments is governed by the managed account agreement between the Brandon University Retirement Plan and Connor, Clark & Lunn Management Ltd. The investment management objective of the Plan is to maximize the long-term total return while protecting the capital value of the fund from major market fluctuations through prudent management of asset allocation and prudent selection of investments. The investment manager is to attain an average rate of return of 3% over the CPI increase for the same period. The Plan s investments are publicly traded. There have been no substantive changes in the Plan s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous periods unless otherwise stated in this note. a) Market Risk Market risk is the risk the value of an investment will fluctuate as a result of changes in market prices whether those changes are caused by factors specific to an individual investment or volatility in interest rates, foreign currencies or other factors affecting similar securities traded in the market. i) Interest rate risk is the risk that fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest rates. The value of the Plan's fixed income investments is directly affected by changes in nominal and real interest rates. There are guidelines in the managed account agreement for the fixed income investment portfolio related to permitted investments, diversification, and quality, and duration management which are designed to mitigate the risks of interest rate volatility. 17

19 Notes to the Financial Statements for the year ended December 31, 2010 ii) Foreign currency risk is the risk that the value of a financial instrument will fluctuate due to changes in foreign exchange rates primarily related to foreign equity holdings. In some instances, forward foreign exchange contracts are used to manage currency exposure in connection with securities purchased in foreign currency. Forward foreign exchange contracts are contractual agreements that establish an agreed upon exchange rate at a settlement date in the future for the purpose of protecting future cash flows from adverse price movements. The Plan's exposure, in cash and investments, to foreign currencies reported in Canadian dollars are as follows: (in thousands of dollars) Canadian cash and short term investments $ 1, % $ 2, % Canadian bonds 37, % 32, % Canadian equities 41, % 38, % 80, % 73, % US equities 14, % 12, % Non-North American equities 13, % 12, % $ 108, % $ 98, % A 10 percent increase or decrease in exchange rates, with all other variables held constant, would result in a change in unrealized gains/(losses) of $ 2,834,445 ( $ 2,500,679 ). iii) Other price risk is the risk that the fair value or future cash flows from portfolio holdings fluctuate because of changes generally, in market prices, other than those arising from interest rate risk or currency risk or as a result of a deterioration in the outlook for a specific issuer. To manage its price risk arising from investments in equity securities, by policy, the portfolio is well diversified. The managed account agreement sets out the limits of investments in any one security as well as concentration within market sectors. The Plan's target asset mix based on market value is: Fixed income 35 % Canadian equity 35 % Foreign equity 25 % Cash 5 % Total exposure to equities is to be no less than 35% of the Pension Fund and no more than 70% of the Pension Fund. 18

20 Notes to the Financial Statements for the year ended December 31, 2010 b) Liquidity Risk Liquidity risk is the risk that the Plan will encounter difficulty in having available sufficient funds to meet its commitments as they come due. It is the Pension Plan s policy to ensure that it will have sufficient cash and short term investments to allow it to meet its liabilities when they come due. The term to maturity and the related market values of bonds and debentures are as follows: (in thousands of dollars) Term to Maturity Less than one year $ 7,783 $ 3,547 One to five years 4,105 9,563 Over five years 25,602 19,277 Total bonds and debentures $ 37,490 $ 32,387 c) Credit Risk Credit risk arises from the possibility that a loss may occur from the failure of another party to perform according to the terms of a contract. Credit risk is the risk the issuer of the debt security or a counter party to a derivative contract is unable to meet its financial obligation. Credit risk encompasses the risk of a deterioration of credit worthiness and concentration risk. The Plan limits credit risk through a managed account agreement with its investment manager that details the specific quality and concentration constraints. At December 31, 2010, the Plan's maximum credit risk exposure related to cash and short-term investments and bonds and debentures is $ 38,519,204 ( $ 34,556,098 ), and accounts receivable is $4,142 ( $ 380,505 ). The Plan limits credit risk by acquiring high quality securities and following the managed account agreement. The managed account agreement establishes limits for ownership of investments and acceptable credit ratings. In the case of bonds and debentures, all must be rated BBB or higher. The breakdown of the fixed income investment portfolio by credit rating from various rating agencies are as follows: (in thousands of dollars) Bonds and debentures investments Credit Rating AAA $ 13, % $ 12, % AA 11, % 9, % A 10, % 7, % BBB 2, % 2, % 37, % 32, % Cash and short-term investments 1,029 2,170 $ 38,519 $ 34,556 19

21 Notes to the Financial Statements for the year ended December 31, Capital Management The capital of the Brandon University Retirement Plan is comprised of the net assets available for pension benefits. Externally imposed capital requirements relate to the administration of the Plan in accordance with the terms of the Plan, The Pension Benefits Act of the Province of Manitoba and the provisions of the Income Tax Act (Canada) and to the fact that the combined assets are held in the name of the Trustees of the Plan as described in note 1 a). The Trustees, as the administrators of the Plan, on behalf of Brandon University, have developed appropriate risk management strategies, as described in note 3, to preserve the net assets available for pension benefits. There have been no significant changes to the University's capital management objectives, policies and processes in the year nor have there been any changes in what the Trustees consider to be the Plan's capital. The pension plan has complied with externally imposed capital requirements during the year. 5. Valuation of Financial Instruments at Fair Value The Plan measures fair values using the following fair value hierarchy that reflects the significant inputs used in making the measurements: Level 1: Quoted market price (unadjusted) in an active market for an identical investment. Level 2: Valuation technique based on observable inputs, either directly (prices) or indirectly (derived from prices). This category includes investments valued using quoted market prices in active markets for similar investment; quoted prices for identical or similar investments in markets that are considered less than active; or other valuation techniques where all significant inputs are directly or indirectly observable from market data. Level 3: Valuation techniques using significant unobservable inputs. This category includes all investments where the valuation technique includes inputs not based on observable market data and the unobservable inputs have a significant effect on the investment's valuation. (in thousands of dollars) Level 1 Level 2 Total Level 1 Level 2 Total Cash $ 231 $ $ 231 $ 221 $ $ 221 Short-term investments ,949 1,949 Bonds and debentures 37,490 37,490 32,386 32,386 Canadian equities 41,997 41,997 38,842 38,842 Foreign equities 28,344 28,344 25,006 25,006 $ 71,370 $ 37,490 $ 108,860 $ 66,018 $ 32,386 $ 98,404 20

22 Notes to the Financial Statements for the year ended December 31, Investments Section 3.29 of the Pension Benefits Act Regulations requires disclosure of each investment that has a fair value greater than 1% of the fair value of all investments. The investments, including pooled funds, are as follows: 2010 Bonds and debentures Connor, Clark & Lunn Bond Pool Fund Class A $ 37,489,664 Canadian equities Connor, Clark & Lunn Q 120/20 Fund Class I $ 13,893,671 PCJ Canadian Equity Fund $ 14,107,904 SRA Canadian Equity Fund $ 13,995,148 US equities Connor, Clark & Lunn US Equity Class A $ 14,671,849 Non-North American equities Connor, Clark & Lunn New Star EAFE Class A $ 13,672, Obligation for Pension Benefits The actuarial present value of accrued pension benefits was determined using the accrued benefit method prorated on service and using assumptions recommended by the actuary and approved by the Trustees. An actuarial valuation was prepared by Eckler Ltd. as at December 31, 2010 to determine the present value of accrued pension benefits as at December 31, The valuation as at December 31, 2010 has not yet been filed with the Pension Commission of Manitoba. The assumptions used in determining the actuarial value of accrued pension benefits were developed by reference to expected long-term market conditions. Significant actuarial assumptions used in the valuation at December 31, 2010 were: Discount rate 5.30 % 5.75 % Rate of salary increase 3.40 % 4.00 % Mortality rate UP1994 Table projected with UP1994 Table projected Scale AA for ongoing future with Scale AA to 2015 improvements in mortality, adjusted by a factor of 75% at each age The next required valuation of the plan will be as at December 31, 2011 and will be completed in

23 Notes to the Financial Statements for the year ended December 31, Election for Exemption from Special Payments The Brandon University Retirement Plan is subject to the Manitoba Pension Benefits Act and Regulations. The University Pension Plans Exemption Regulation 141/2007 allowed the University to make an election to be exempt from solvency and transfer deficiency payments. "2(1) An employer in relation to a university plan may, by filing a written election with the plan administrator, elect to be exempt from the solvency and transfer deficiency provisions." On January 19, 2009 the University filed such an election. With the exemption, the Plan will continue to be subject to the going-concern funding provisions of the Act. 9. Going-Concern Deficit Funding The actuarial valuation indicated an actuarial deficit of $32,565,000, for funding purposes, as at December 31, 2010 using the accrued benefit method. The actuarial deficit is determined using the actuarial value of assets, which is based on the smoothing of the excess of investment rates of return over a four year period relative to the expected rate of return. The University will be required to fund the matching contributions, as well as the actuarial cost of the defined benefits in excess of the matching costs. The funding deficit will be funded over a maximum of 15 years. Special payments totaling $3,126,000 will be made in The next going-concern valuation will be performed as at December 31, 2011 and completed in Contributed Services Brandon University provides staff and miscellaneous administrative services at no charge to the Plan. The cost of these services is not reflected in the Financial Statements. 11. Accounting Standards Changes - Pension Plans The CICA's Accounting Standards Board has approved new accounting standards for pension plans, Section 4600 Pension Plans, effective for fiscal years beginning on or after January 1, 2011, with earlier adoption permitted. The Brandon University Retirement Plan has adopted these standards for the 2010 financial statements. There were no restatements required upon adoption of these standards; however, certain comparative figures have been reclassified to conform to the current year's presentation. 22